House Finance Committee reports tax conformity substitute to Appropriations after technical briefing and public support

Delegate Watts presented a substitute to the panel’s annual tax-conformity bill and the House Finance Committee voted to report the measure and refer it to the Appropriations Committee.

The substitute, described by Watts as the final substitute, updates Virginia law to reflect selected federal changes and retains prior Virginia choices to deconform from some federal provisions. Watts told the committee the bill makes permanent a $500 eligible-educator expense deduction and preserves the state’s pass-through entity tax mechanism while indexing other subtractions to inflation.

“Congress has totally removed the limit on deductions that anyone can take for charitable deductions,” Watts said during her overview as she explained choices the Commonwealth is making about what to conform to and what to leave unchanged. “This is one that we’ve always deconformed on.”

Ryan Cunningham of the Virginia Department of Taxation, who answered technical questions for the committee, said the substitute is roughly revenue-neutral for fiscal year 2026 and becomes a small net gain in later years once timing differences and a series of smaller additions and subtractions are netted. He explained the bill conforms to a federal change in the business interest limitation that alters when and how businesses may claim interest deductions and said the change largely shifts the timing of deductions rather than eliminating them.

“What this bill does is allow you to still take all of that interest at the federal level, but reduce deductions in Virginia,” Cunningham said, describing a timing effect that produces a near-term neutrality in the general fund.

Committee members asked about rolling conformity and whether the substitute effectively lifts a pause in automatic conformity after fiscal year 2026. Delegate McNamara asked whether previously discussed guardrails would have produced similar results; Cunningham replied that rolling conformity could produce similar outcomes depending on whether conformity is applied provision-by-provision or to the act as a whole.

Several stakeholder witnesses urged the committee to move the bill. Emily Walker of the Virginia Society of CPAs said taxpayers need certainty now because tax season had already begun: “There are provisions in this bill that if not adopted will affect taxpayers filing their taxes now. We support the bill and we ask that you move it.” Megan Davis of the Commonwealth Institute for Fiscal Analysis said Watts’ substitute “decouples from the most costly provisions from HR 1,” putting revenues back into the budget and avoiding some structures the institute views as unfair. Kristen Young of VEA said the association supports the bill and thanked the patron.

Deputy Chair Hernandez and others confirmed the substitute includes a second enactment clause (the emergency clause) before the committee moved to report and refer. The committee recorded the roll; the transcript shows the bill as substituted was referred to Appropriations with the clerk reporting 21 yays on the vote.

The committee’s action sends policy and budget decisions about the substitute to Appropriations, where the fiscal committee may make additional changes to the package before final floor consideration.